U.S. economy running in place

Jobs, manufacturing data unlikely to change Fed thinking

WASHINGTON (MarketWatch) -- Sometimes the economy is a sprinter, rocketing ahead. Other times it's a marathoner, growing at a sustained pace. But at least as far as the first week of 2007 goes, it's looking like the U.S. economy is just going to be running in place.

A closely watched report about job growth in December is likely to come in only modestly lower than in November. And a key survey of manufacturing is also set to remain mostly the same.

Taken together, those and other data appear to point to little major movement one way or the other regarding the direction of the economy, giving the Federal Reserve enough reason to stay firmly on the sidelines and leave the federal funds rate unchanged at 5.25% in the near future.

It will be a shorter-than-normal trading week, with stock and bond markets closed for New Year's Day on Monday, and stock markets closed again on Tuesday in observance of a day of mourning for President Gerald Ford, who died last week at 93.

The bond market will close early, at 2 p.m. Eastern, on Tuesday. The Federal Reserve and other government offices not essential to national security will also be closed Tuesday, and the release of the minutes of the Dec. 12 meeting of the Federal Open Market Committee will be delayed until Wednesday at 2 p.m. Eastern.

Payrolls to get usual scrutiny

The data meriting the closest attention will be the nonfarm payrolls report for December, due at 8:30 a.m. Eastern on Friday. Economists surveyed by MarketWatch are expecting fewer jobs to have been added to U.S. payrolls, forecasting a gain of 120,000 versus the 132,000 added in November.

"The job market is getting a little weaker," said Bill Cheney, chief economist for John Hancock Financial Services. But the weakness isn't sufficient, he said in an interview, to force the Fed to act on monetary policy.

Based on a gain of about 120,000, "they won't have to raise rates or cut rates," he said of the Fed's policymakers.

Meanwhile, the nation's jobless rate is expected to stay put at 4.5%. It reached 4.5% in November after hitting a five-year low of 4.4% in October.

Average hourly earnings are expected to rise slightly, up by 0.4% compared with a gain of 0.2% in November. And the Labor Department's data on the average workweek are expected to show a fractional increase, to 34 hours from 33.9 hours in November.

The jobless rate, hourly earnings and average workweek are reported at the same time as payrolls.

Also on Friday, Fed Chairman Ben Bernanke is scheduled to speak at a conference in Chicago about central banking and bank supervision in the U.S., at 1:45 p.m. Eastern time.

Fed likely to be unmoved, at least for now

Ken Mayland of ClearView Economics said he believes the economy's entering "something of a slowdown period" but added he doesn't think next week's data will sway Fed policymakers.

Still, he said in an interview, "it does seem as if employers have decided to exercise a little more caution in terms of their hiring practices," suggesting they expect the economy to remain sluggish.

As such, Mayland said, he's forecasting below-trend growth of 1.5% in gross domestic product for the first and second quarters of 2007, versus the trend of 3.25%. He added he expects a bump up in fourth-quarter growth thanks to lower energy prices and higher consumer spending.

Next year, however, "the tendency will be toward below-average growth," Mayland said.

Part of the smaller gain in December payrolls will come from a loss of another 15,000 manufacturing jobs, Mayland said, adding: "The place where the economic slowdown is really evident has been in the manufacturing sector."

ISM manufacturing

Another key indicator scheduled for next week is likely to put the nation's manufacturing activity in December at about the same rate as November, when it reached its lowest level since April 2003.

Wall Street economists surveyed by MarketWatch expect the Institute for Supply Management to report that its factory index fell to 49.0% from 49.5%. The release is due out at 10 a.m. Eastern on Wednesday.

Readings below 50% indicate contraction in the manufacturing sector. The lower-than-expected number in November stoked fears that the economy could be softening so much that the Fed might have to cut interest rates to stimulate demand.

But stronger-than-expected data during the week of Dec. 25 helped diminish some of those fears.

Data showed that sales of existing homes unexpectedly rose in November and that business activity in the Chicago area rebounded more than forecast in December. Also, a report showed U.S. consumer confidence surprisingly gained in December. New-home sales also rose more than expected.

Next week's data also include figures about construction spending and factory orders. Construction spending in November is expected to fall by 0.6%, compared with the 1.0% by which it fell in October. The report is due at 10 a.m. Eastern on Wednesday.

Factory orders, meanwhile, are expected to grow by 1.2% in November after falling 4.7% in October. The report's scheduled for release at 10 a.m. Eastern on Thursday.

FOMC policymakers holds their next meeting Jan. 30 and 31.

Robert
Schroeder

Robert Schroeder is the White House reporter for MarketWatch. Follow him on Twitter @mktwrobs.

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